EU bank capital ratios face hit from new accounting rules

LONDON, July 13 (IFR) - New accounting rules look likely to increase the provisions European banks take for bad loans by 13% and decrease their common equity Tier 1 capital ratios by 45bp on average, marking a substantial impact on their strength, a study released on Thursday showed.

The new rules, called IFRS 9, come into effect at the start of next year. They change the way banks make provisions for bad and non-performing loans, and aim to make them provision for potential losses at an earlier stage than under current accounting treatment.

Banks have already warned it could significantly increase how much they have to set aside, and they are expected to give more details at upcoming results.

The new accounting rules could impact the lending practices of banks, according to a study of about 50 banks carried out by the European Banking Authority.

The EBA’s impact assessment also showed 72% of those banks expect IFRS 9 to increase volatility in their profit and loss accounts.

The study showed banks expect their CET1 capital ratios to decline by 45bp on average, which is less than an average decline of 59bp in the EBA’s previous impact assessment released last year.

It is a more moderate impact than some in the industry had predicted. A transition or phase-in of the full impact is also expected to be allowed, although European authorities have not yet finalised how that will work.

But it still marks a significant drop in capital ratios at a time when regulators continue to encourage banks to build them up and stronger banks want to increase their dividend payouts.

Small banks expect to be harder hit. The average impact at smaller banks in the EBA study was 78bp, compared with 33bp at large banks. That is mainly because smaller banks use a standardised approach to measuring credit risk, compared to the internal ratings-based approach used by large banks.

Seven banks surveyed, including six smaller banks, estimated the impact on their CET1 or total capital ratio would be above 75bp.

The new accounting rules will increase provisions by 13% on average across the banks, down from 18% estimated in the previous assessment, the EBA said.

But in this area smaller banks expect to less affected: they expect provisions to rise by 5% on average, compared with a 15% rise at large banks. (Reporting by Steve Slater)